A 401(k) is an important way to save for your golden years. While many Americans have heard of 401(k) plans because it is part of their employer’s benefits package, few have heard of a self-directed 401(k) plan.
These two types of accounts are similar in many ways. However, a self-directed 401(k) plan provides you with more investment options, flexibility and control. Because you have more types of investment possibilities, you are able to not only diversify your portfolio more but also help prevent economic downturns from destroying your retirement funds. Sounds great, doesn’t it? As with your employer’s 401(k) plan, a self-directed 401(k) often relies on contributions. If you are interested in learning more about contribution regulations for a self-directed 401(k) plan work, keep reading!
Just like the 401(k) plan offered by your employer, the Internal Revenue Service (IRS) allows for you to make elective contributions. Elective contributions are funds, as directed by you, which are withheld from your paycheck and applied directly to your 401(k). These funds are withheld before taxes are taken from your check. The IRS dictates how much you can contribute to your 401(k). For the most part, the IRS regulations fall into two groups: those that apply to people under 50 and those for individuals who are 50 or older.
Your contributions typically consist of two types of discretionary fund sources. The contributions that come directly from your salary are often referred to as personal deferrals. When you opt to have your contributions taken from your salary before they are taxed, you are investing in a traditional 401(k) account. Should you opt for contributions to be made after taxes have been removed from your paycheck, you now have a Roth 401(k). Profit sharing, the other type of funding source, refers to those contributions made by your employer.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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